Reference no: EM131119388
Revenue Recognition-Alternative Methods Peterson Industries has three operating divisions-Farber Mining, Glesen Paperbacks, and Enyart Protection Devices. Each division maintains its own accounting system and method of revenue recognition.
Farber Mining specializes in the extraction of precious metals such as silver, gold, and platinum. During the fiscal year ended November 30, 2010, Farber entered into contracts worth $2,250,000 and shipped metals worth $2,000,000. A quarter of the shipments were made from inventories on hand at the beginning of the fiscal year, and the remainder was made from metals that were mined during the year. Mining totals for the year, valued at market prices, were: silver at $750,000, gold at $1,400,000, and platinum at $490,000. Farber uses the completion-of-production method to recognize revenue, because its operations meet the specified criteria-i.e., reasonably assured sales prices, interchangeable units, and insignificant distribution costs. Enyart Paperbacks Enyart Paperbacks sells large quantities of novels to a few book distributors that in turn sell to several national chains of bookstores. Enyart allows distributors to return up to 30% of sales, and distributors give the same terms to bookstores. While returns from individual titles fluctuate greatly, the returns from distributors have averaged 20% in each of the past 5 years. A total of $7,000,000 of paperback novel sales was made to distributors during the fiscal year. On November 30, 2010, $2,200,000 of fiscal 2010 sales were still subject to return privileges over the next 6 months. The remaining $4,800,000 of fiscal 2010 sales had actual returns of 21%. Sales from fiscal 2009 totaling $2,500,000 were collected in fiscal 2010, with less than 18% of sales returned. Enyart records revenue according to the method referred to as revenue recognition when the right of return exits, because all applicable criteria for use of this method are met by Enyart's operations. Glesen Protection Devices Glesen Protection Devices works through manufacturers' agents in various cities. Orders for alarm systems and down payments are forwarded from agents, and Glesen ships the goods f.o.b. shipping point. Customers are billed for the balance due plus actual shipping costs. The firm received orders for $6,000,000 of goods during the fiscal year ended November 30, 2010. Down payments of $600,000 were received, and $5,000,000 of goods were billed and shipped. Actual freight costs of $100,000 were also billed. Commissions of 10% on product price were paid to manufacturers' agents after the goods were shipped to customers. Such goods are warranted for 90 days after shipment, and warranty returns have been about 1% of sales. Revenue is recognized at the point of sale by Glesen.
(a) There are a variety of methods for revenue recognition. Define and describe each of the following methods of revenue recognition, and indicate whether each is in accordance with generally accepted accounting principles.
(1) Completion-of-production method.
(2) Percentage-of-completion method.
(3) Installment-sales method.
(b) Compute the revenue to be recognized in the fiscal year ended November 30, 2010, for
(1) Farber Mining.
(2) Enyart Paperbacks.
(3) Glesen Protection Devices
(CMA adapted)
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